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Chapter 6 Questions

Chapter 6 Questions

Question 3

Question 3 
a Initial investment Per year cost Period Opportunity Cost NPV EAC
 $     (12,000.00)  $   (5,000.00) Infinite 10%  $  (17,000.00)  $ (1,700.00)
b Initial investment Per year cost Period Opportunity Cost NPV EAC
 $       (5,000.00)  $   (1,000.00) 20 years 10% ($1,363.64)  $    (136.36)
c Initial investment Per year cost Period Opportunity Cost NPV EAC
 $       (3,500.00)  $   (1,200.00) 15 years 10% ($4,272.73)  $    (427.27)

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Question 4

Question 4
Option A
Cost of wooden sliding  $                                                                    5,000.00
Maintenance cost  $                                                                    1,000.00
Useful life 10 years
Annuity factor @ 10% 6.1442
Equivalent Annual Cost Cost of sliding/ Annuity Factor + Maintainance Cost
Cost of sliding Annuity Factor Maintenance Cost Ecquivalent Annual Cost
 $                                                                    5,000.00 6.1442  $         1,000.00  $                      1,813.78
Option B
Cost of Aluminum siding  $                                                                  15,000.00
Useful life Infinity
Annuity Factor @ 10% 0
Maintenance Cost x(say)
Equivalent Annual cost  $                                                                    1,500.00
Cost of aluminium siding Annuity Factor @10% Maintenance Cost Ecquivalent Annual Cost
 $                                                                    1,500.00 0 x #DIV/0!
Answer The maintenance costs should not exceed $1812.776

Question 6

Question 6
a Investment in the new distribution system Additional working capital The initial investment for the project
 $                            10,000,000.00  $                 1,000,000.00  $  11,000,000.00
b calculation of annual operating cash flow from this project
Additional sales  $                             10.00
Less variable cost  $                              (4.00)
Contribution Margin  $                               6.00
4 Less fixed costs
less additional advertising  $                              (1.00)
Depreciation( &10 million /10 years)  $                              (1.00)
Annual operating income  $                               4.00
Less tax @ 40%  $                               1.60
Net Income  $                               2.40
Add Depreciation  $                               1.00
Annual operating cash flow  $                               3.40
c NPV of the project in millions
Year  $                                   – 1 2 3 4 5 6 7 8 9 10
Investment in the new distribution system  $                            (10.00)
Operating cash flow  $                  3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40
Additional working capital  $                               1.00
Net Cashflow #NAME?  $                  3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40  $ 3.40
Discount factor @8%  $                               1.00 $0.93  $ 0.86  $ 0.79  $ 0.74  $ 0.68  $ 0.63  $ 0.58  $ 0.54  $ 0.50  $ 0.46
Present value  $                            (11.00)  $                  3.16  $ 2.92  $ 2.69  $ 2.52  $ 2.31  $ 2.14  $ 1.97  $ 1.84  $ 1.70  $ 1.56
NPV –  $ 11.81

Other Related Post: Liquidity Ratios

References

Damodaran, A. (2010). Applied corporate finance. John Wiley & Sons.

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Question 


Week 5 Chapter 6 Questions

Select three formula-driven problems from Chapter 6 that you wish to showcase and prepare a Microsoft Excel document showing the Excel formulas used to prepare the solution for those problems.

Chapter 6 Questions

REMINDER: Part of the grade you receive on your problems is the utilization of Formulas. Therefore, do not pick issues that only require a narrative!

Textbook:

Damodaran, A. (2010). Applied corporate finance. John Wiley & Sons.

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